Africa/Global: Follow the Money

Editor's Note

"New research from the Tax Justice Network shows that the gap
between where companies pay tax and where they really do their
business is huge ... even developed countries with state-of-the-art
tax legislation and well-equipped tax authorities cannot stop
multinationals dodging their tax without a thorough reform of the
global tax system. ... [these practices have] a relatively greater
impact on developing countries, whose public revenues are more
dependent on the taxation of large businesses."

Two new reports, briefly excerpted in this AfricaFocus Bulletin,
shed light on the complex global systems of tax evasion and tax
avoidance which are draining resources from public needs in both
rich and poor countries. While giant companies and the super-rich
move their money around the world in secrecy, the system is obscured
both by secrecy and by deceptive language.

Thus, according to the highly regarded and well-publicized
Corruption Perception Index from Transparency International,
Switzerland, Hong Kong, the United States, Singapore, Luxembourg,
Germany, and the United Kingdom are all among the 20 "least corrupt
countries" in the world. Yet the less-well-known Financial Secrecy
Index, from Tax Justice Network, also places them among the top 15
"secrecy jurisdictions" (also known as "tax havens") which serve as
the essential "enablers" of corruption and of illicit financial
flows by multinational corporations.

Similarly, there is no doubt that Africa and other developing
regions are hardest hit by this global tax abuse, while they have
the most urgent needs for investment in public goods. But a new
report by the Global Tax Justice Network and other civil society
groups shows that rich countries themselves are also major losers,
as corporations shift profits from one rich country to another (as
well as to smaller jurisdictions fitting the stereotype of
"tax havens"). In 2012 U.S. multinationals alone shifted between
$500-$700 billion dollars out of the country, or roughly 25 percent
of their annual profits.

European Union moves furthest with reforms; USA causes great
concern; and developing countries are (as usual) reaping few
benefits.

Today the Tax Justice Network launches the 2015 Financial Secrecy
Index, the biggest ever survey of global financial secrecy. This
unique index combines a secrecy score with a weighting to create a
ranking of the secrecy jurisdictions and countries that most
actively promote secrecy in global finance.

Most countries' secrecy scores have improved. Real action is being
taken to curb financial secrecy, as the OECD rolls out a system of
automatic information exchange (AIE) where countries share relevant
information to tackle tax evasion. The EU is starting to crack open
shell companies by creating central registers of beneficial owners
and making that information available to anyone with a legitimate
interest. The EU is also requiring multinationals to provide
country-by-country financial data.

But these global and regional initiatives are flawed and face
sabotage by lobbies that have already weakened them. Secrecy-related
financial activity risks being shifted to other areas such as the
all-important trusts sector, where no serious action is being taken
despite promises made by the G8 in 2013, and shell companies, where
many secrecy jurisdictions such as Dubai, the British Virgin Islands
or Nevada in the U.S. are refusing to open up.

Crucially, even in those areas where there has been progress,
developing countries are largely being sidelined: OECD countries are
the main beneficiaries.

Our analysis also reveals that the United States is the jurisdiction
of greatest concern, having made few concessions and posing serious
threats to emerging transparency initiatives. Rising from sixth to
third place in our index, the US is one of the few whose secrecy
score worsened after 2013. Switzerland stays at the top of the index
and for good reason: despite what you may have heard, Swiss banking
secrecy is far from dead, though it has curbed its secrecy somewhat.
The United Kingdom also remains a huge concern. While its own
secrecy is moderate, its global network of secrecy jurisdictions –
the Crown Dependencies and Overseas Territories – still operate in
deep secrecy and have, for instance, not co-operated in creating
public registers of beneficial ownership. The UK has failed to
address this effectively, though it has the power to do so.

The progress: a scorecard

Since the global financial crisis emerged in 2008, governments have
sought to curb budget deficits by cracking down on offshore
corporate and individual tax cheating and financial crimes by the
world's wealthiest citizens. Campaigners have shown them the way and
the sea change in the political climate has been remarkable.
Progress has come in three main areas.

Twelve years ago the tax justice
movement created country-by- country reporting (CbCR), a
measure that can shine a light
country where they operate, including tax havens. They told us CbCR
would never happen: it is now endorsed at G20 level and the first
schemes to implement it are in place. However, we are concerned
that CbCR cannot work unless the information is made publicly
available.

Just four years ago they laughed at us for pushing the concept of
automatic information exchange (AIE), where countries routinely
share information about each others' taxpayers so they can be taxed
appropriately. AIE is now being rolled out worldwide.

They said we at TJN were crazy to contemplate public registries of
beneficial ownership (BO), to crack open shell companies and ensure
that businesses, governments and the public know who they are
dealing with, and to provide the basis for effective AIE. Beneficial
ownership registries are now endorsed at G20 level: we now need a
big political push to make them a reality and bring this information
into the public domain.

Of these areas most progress has been made on AIE, with several
schemes emerging. Though the G20 had mandated the OECD to create a
country-by-country reporting standard, what it came up with has
fallen well short, victim of heavy lobbying behind the scenes by
U.S. multinationals in particular. Finally, the UK has passed
legislation to create a public register of company beneficial
ownership information, and the EU has required all member states to
make beneficial ownership information available to anyone with a
legitimate interest. However, little progress has been made towards
creating an effective form of public registry for offshore trusts.

These broad changes are welcome, and we are pleased to see the EU
leading the way: even some of Europe's historically worst secrecy
jurisdictions, such as Luxembourg and Austria, are engaging.

The EU's leadership role, however, is called into question by recent
resistance, spearheaded by Germany, to block public access to CbCR
data and prevent expansion of CbC reporting beyond the banking and
extractives sectors. (Read more about the current EU-level
negotiations here.)

Almost all of the progress to date has arisen from public pressure.
To counter the lobbies that constantly seek to undermine progress,
sustained political grass roots pressure is indispensable.

The backsliding

Yet huge problems remain.

None of these initiatives take the interests of developing countries
sufficiently into account. They haven't been centrally involved in
setting the rules, and most will see little if any benefit. (Note,
too, that secrecy is just part of a wider charge sheet against tax
havens, as the box above explains.)

Meanwhile, even progress to date is under threat:

Private sector 'enablers' and recalcitrant jurisdictions like
Dubai and the Bahamas are beavering away finding exclusions and
loopholes, being picky about which countries they'll exchange
information with, and simply disregarding the rules.

The United States' hypocritical stance of seeking to protect
itself against foreign tax havens while preserving itself as a tax
haven for residents of other countries needs to be countered. The
European Union must take the lead here by imposing a 35 percent
withholding tax on EU-sourced payments to U.S. and other noncompliant
financial institutions, in the same way as the U.S. FATCA
scheme does; and this should become global standard practice.

The UK has been playing a powerful blocking role to protect its
huge, slippery and dangerous trusts sector, probably the biggest
hole in the entire global transparency agenda. See below for more
details.

The next section gives a brief description of the biggest players in
the secrecy world today.

FSI 2015: the big players

[See full press release for more details on each country]

Switzerland (first place)

United States (3rd place)

United Kingdom [not in top ten, but "supports a network of secrecy
jurisdictions around the world." If counted together, would be first
place]

Hong Kong [2nd place]

Singapore [4th place]

Cayman Islands [5th place]

Luxembourg [6th place]

Lebanon [7th place]

Germany [8th place]

Bahrain [9th place]

Dubai [10th place]

About the Financial Secrecy Index

The Financial Secrecy Index ranks jurisdictions according to their
secrecy and the scale of their offshore financial activities. A
politically neutral ranking, it is a tool for understanding global
financial secrecy, tax havens or secrecy jurisdictions, and illicit
financial flows or capital flight. The index was launched on
November 2, 2015.

Shining light into dark places

An estimated $21 to $32 trillion of private financial wealth is
located, untaxed or lightly taxed, in secrecy jurisdictions around
the world. Secrecy jurisdictions - a term we often use as an
alternative to the more widely used term tax havens - use secrecy to
attract illicit and illegitimate or abusive financial flows.

Illicit cross-border financial flows have been estimated at $1-1.6
trillion per year: dwarfing the US$135 billion or so in global
foreign aid. Since the 1970s African countries alone have lost over
$1 trillion in capital flight, while combined external debts are
less than $200 billion. So Africa is a major net creditor to the
world - but its assets are in the hands of a wealthy élites,
protected by offshore secrecy; while the debts are shouldered by
broad African populations.

Yet all rich countries suffer too. For example, European countries
like Greece, Italy and Portugal have been brought to their partly
knees by decades of tax evasion and state looting via offshore
secrecy.

A global industry has developed involving the world's biggest banks,
law practices, accounting firms and specialist providers who design
and market secretive offshore structures for their tax- and lawdodging
clients. 'Competition' between jurisdictions to provide
secrecy facilities has, particularly since the era of financial
globalisation really took off in the 1980s, become a central feature
of global financial markets.

The problems go far beyond tax. In providing secrecy, the offshore
world corrupts and distorts markets and investments, shaping them in
ways that have nothing to do with efficiency. The secrecy world
creates a criminogenic hothouse for multiple evils including fraud,
tax cheating, escape from financial regulations, embezzlement,
insider dealing, bribery, money laundering, and plenty more. It
provides multiple ways for insiders to extract wealth at the expense
of societies, creating political impunity and undermining the
healthy 'no taxation without representation' bargain that has
underpinned the growth of accountable modern nation states. Many
poorer countries, deprived of tax and haemorrhaging capital into
secrecy jurisdictions, rely on foreign aid handouts.

This hurts citizens of rich and poor countries alike.

What is the significance of this index?

In identifying the most important providers of international
financial secrecy, the Financial Secrecy Index reveals that
traditional stereotypes of tax havens are misconceived. The world's
most important providers of financial secrecy harbouring looted
assets are mostly not small, palm-fringed islands as many suppose,
but some of the world's biggest and wealthiest countries Rich OECD
member countries and their satellites are the main recipients of or
conduits for these illicit flows.

The implications for global power politics are clearly enormous, and
help explain why for so many years international efforts to crack
down on tax havens and financial secrecy were so ineffective, it is
the recipients of these gigantic inflows that set the rules of the
game.

Yet our analysis also reveals that recently things have genuinely
started to improve. The global financial crisis and ensuing economic
crisis, combined with recent activism and exposure of these problems
by civil society actors and the media, and rising concerns about
inequality in many countries, have created a set of political
conditions unparalleled in history. The world's politicians have
been forced to take notice of tax havens. For the first time since
we first created our index in 2009, we can say that something of a
sea change is underway.

World leaders are now routinely talking about the scourges of
financial secrecy and tax havens, and putting into place new
mechanisms to tackle the problem. For the first time the G20
countries have mandated the OECD to put together a new global system
of automatic information exchange to help countries find out about
the cross-border holdings of their taxpayers and criminals. This
scheme is now being rolled out, with first information due to be
exchanged in 2017.

Yet of course these schemes are full of loopholes and shortcomings:
many countries are planning to pay only lip service to them, if that
-- and many are actively seeking ways to undermine progress, with
the help of a professional infrastructure of secrecy enablers. The
edifice of global financial secrecy has been weakened - but it
remains fully alive and hugely destructive. Despite what you may
have read in the media, Swiss banking secrecy is far from dead.
Without sustained political pressure from millions of people, the
momentum could be lost.

The only realistic way to address these problems comprehensively is
to tackle them at root: by directly confronting offshore secrecy and
the global infrastructure that creates it. A first step towards this
goal is to identify as accurately as possible the jurisdictions that
make it their business to provide offshore secrecy.

This is what the FSI does. It is the product of years of detailed
research by a dedicated team, and there is nothing else like it out
there. We also have a set of unique reports outlining detailed
offshore histories of the biggest players in the game.

G20 countries are among the biggest losers when US multinationals
avoid paying taxes where they do business. This is the main finding
of 'Still Broken' a new report on the global tax system released by
the Tax Justice Network, Oxfam, Global Alliance for Tax Justice and
Public Services International in advance of the G20 leaders' meeting
in Turkey.

Overall it is estimated that, in order to reduce their tax bills, US
multinationals shifted between $500 and 700 billion—a quarter of
their annual profits—out of the United States, Germany, the United
Kingdom and elsewhere to a handful of countries including the
Netherlands, Luxembourg, Ireland, Switzerland and Bermuda in 2012.
In the same year, US multinational companies reported US$ 80 billion
of profits in Bermuda – more than their profits reported in Japan,
China, Germany and France combined.

Claire Godfrey, head of policy for Oxfam's Even it Up Campaign said:
"Rich and poor countries alike are haemorrhaging money because
multinational companies are not required to pay their fair share of
taxes where they make their money. Ultimately the cost is being
borne by ordinary people – particularly the poorest who rely on
public services and who are suffering because of budget cuts."

Rosa Pavanelli, general secretary of Public Services International
said: "Public anger will grow if the G20 leaders allow the world's
largest corporations to continue dodging billions in tax while
inequality rises, austerity bites and public services are cut."

The G20 Heads of State are expected to consider a package of
measures they claim will address corporate tax avoidance at their
annual meeting in Turkey on 15 and 16 November.

Alex Cobham, director of research at Tax Justice Network, said: "The
corporate tax measures being adopted by the G20 this week are not
enough. They will not stop the race to the bottom in corporate
taxation, and they will not provide the transparency that's needed
to hold companies and tax authorities accountable. It's in the G20's
own interest to support deeper reforms to the global tax system."

Twelve countries – the United States, Germany, Canada, China,
Brazil, France, Mexico, India, UK, Italy, Spain and Australia –
account for roughly 90 percent of all missing profits from US
multinationals. For example, US multinationals make 65 percent of
their sales, employ 66 percent of their staff and hold 71 percent of
their assets in America but declare only 50 percent of their profits
in the country.

While G20 countries lose the largest amount of money, low income
developing countries such as Honduras, the Philippines and Ecuador
are hardest hit because corporate tax revenues comprise a higher
proportion of their national income. It is estimated, for example,
that Honduras could increase healthcare or education spending by
10-15 percent if the practice of profit shifting by US
multinationals was stopped.

Dereje Alemayehu, chair of the Global Alliance for Tax Justice said:
"If big G20 economies with well-developed tax legislation and wellsupported
tax authorities cannot put a stop to corporate tax abuse,
what hope have poor countries with less well-resourced tax
administrations? Poor countries need a seat at the table in
negotiations on future tax reforms to ensure that they can claim tax
revenues which are desperately needed to tackle poverty and
inequality."

The Tax Justice Network, Oxfam, Global Alliance for Tax Justice and
Public Services International are calling on the G20 to support
further reforms to the global tax system that involve all countries
on an equal footing. These reforms should effectively tackle harmful
tax practices such as profit shifting and the use of corporate tax
havens and should halt the race to the bottom in general corporate
tax rates.

Summary of report

In 2013 the OECD, supported by the G20, promised to bring an end to
international corporate tax avoidance which costs countries around
the world billions in tax revenues each year. However, with the
recently announced actions against corporate tax dodging, G20 and
OECD countries have failed to live up to their promise. Despite some
meaningful actions, they have left the fundamentals of a broken tax
system intact and failed to curb tax competition and harmful tax
practices.

It is often assumed that the richest and largest economies, home to
most of the world's multinationals, defend the current system
because it is in their interests.

However, new research from the Tax Justice Network1 shows that the
gap between where companies pay tax and where they really do their
business is huge and that among the biggest losers are G20 countries
themselves, including the US, UK, Germany, Japan, France, Mexico,
India, and Spain. This shows that even developed countries with
state-of-the-art tax legislation and well-equipped tax authorities
cannot stop multinationals dodging their tax without a thorough
reform of the global tax system.

Profit shifting to reduce taxes is happening on a massive scale. In
2012, US multinationals alone shifted $500–700bn, or roughly 25
percent of their annual profits, mostly to countries where these
profits are not taxed, or taxed at very low rates. In other words,
$1 out of every $4 of profits generated by these multinationals is
not aligned with real economic activity.

Large corporations and wealthy elites exploit the rigged
international tax system to avoid paying their fair share of taxes.
This practice has a relatively greater impact on developing
countries, whose public revenues are more dependent on the taxation
of large businesses. Recent IMF research indicates that revenue loss
to developing countries is 30 percent higher than for OECD countries
as a result of the base erosion and profit shifting activities of
multinational companies.

Tax avoidance is a key factor in the rapid rise in extreme
inequality seen in recent years. As governments are losing tax
revenues, ordinary people end up paying the price: schools and
hospitals lose funding and vital public services are cut. Fair
taxation of profitable businesses and rich people is central to
addressing poverty and inequality through the redistribution of
income. Instead, the current global system of tax avoidance
redistributes wealth upwards to the richest in society.

That is why civil society organizations, united in the C20 group,
together with trade unions, are calling for the actions announced by
the OECD to be regarded only as the beginning of a longer and more
inclusive process to re-write global tax rules and to ensure that
multinationals pay their fair share, in the interest of developed
and developing countries around the world.

Considering the enormous losses that countries around the world
incur, it is alarming that the G20 seems fairly satisfied with the
current agenda. Governments and citizens of G20 countries should
wake up, face the facts and take additional action immediately.

AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.

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